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Time.com Thu Feb 19, 10:50 am ET The Obama Administration rolled out its much-awaited foreclosure-prevention plan on Wednesday, saying it could help as many as seven to nine million homeowners meet their mortgage payments. In contrast to last week's detail-light financial-rescue blueprint, the multi-pronged policy to shore up the housing market, announced by the President on a trip to foreclosure-riddled Phoenix, was packed with specifics. Key components include modifying the terms of delinquent loans, refinancing underwater mortgages and plowing more money into the federal housing agencies in order to keep mortgage rates low. How effective all that will be is an unanswered question. No plan can change the fundamental economics of a bubble deflating or an economy stalling - of overpriced homes returning to more-reasonable prices and out-of-work homeowners not having the income to make mortgage payments. What this plan does offer, though, is a series of targeted interventions designed to help specific groups of borrowers, and by doing that to hopefully limit the knock-on damage caused by foreclosures, both to neighborhoods and the overall economy. "This will help some people who deserve to be helped," says Joe Gyrouko, a professor of real estate and finance at the University of Pennsylvania's Wharton School. "But will this stop the decline in housing prices? No." (See the 25 People to Blame for the Financial Crisis.) The main part of the plan calls for spending up to $75 billion of Treasury's TARP funds to restructure the loans of homeowners who are behind on their mortgages, or at immediate risk of falling behind. Since foreclosure is such an expensive process, most lenders are already modifying some loans voluntarily. But mortgage rewrites haven't necessarily been lowering a borrower's monthly payment by much, if at all - and people whose loans are held by investors have often left out in the cold. Under the new plan, servicers, the companies that collect mortgage checks, will be paid $1,000 every time they cut the interest rate on a loan to reduce the monthly payment to no more than 38% of a
Even though the program is voluntary, there are early signs that it might be the kick in the pants needed to get servicers to more aggressively rewrite loans. At a mortgage bankers' conference in Tampa on Wednesday, services praised the incentive structure, and Jamie Dimon, the CEO of JP Morgan Chase, went on CNBC to say he thought the plan would "lead to a lot more modifications." An earlier effort to spark loan rewrites proved to be a flop, but the Administration thinks this new program could reach three to four million homeowners. The plan also includes an endorsement of the idea that Congress might change the bankruptcy code to let judges write-down mortgage debt - a not-to-subtle reminder that if the mortgage industry doesn't play ball with voluntary modifications, a more imposing solution could be around the corner. (See pictures of Americans in their homes.) In crafting the plan, policymakers had to walk a fine line between helping borrowers who have been caught off-guard by tricky mortgage products and falling house prices, and those who simply made imprudent decisions and genuinely can't afford their homes. In order to avoid propping up the second group, Treasury won't subsidize loan modifications that reduce the interest rate below 2%. If you can't afford a 2% mortgage, in the eyes of the government you can't afford your house. The plan also doesn't apply to investors, or people with jumbo mortgages - those that historically have run more than $417,000. Loans on homes that would be more valuable to lenders if repossessed won't get modified.
Those attempts to avoid
moral hazard, though, might make the plan less effective in stemming the
tide of foreclosures. "This goes a long way, but not far enough," says
Bruce Marks, who runs the
Neighborhood Assistance Corporation of America, a non-profit that
works with servicers to restructure loans. After five years, the
interest rate on modified loans can again rise, up to the industry
average at the time the change is made - even if that pushes borrowers
above the 38% debt-to-income ratio. The plan also only encourages, but
does not require, servicers to make adjustments to principal balance -
the generally acknowledged best-way to keep people in their homes,
especially when they owe more than their house is worth. In certain
markets, where home prices have dropped most precipitously, or where
investors make up a large portion of the homebuyers, the plan will
likely fall far short of having much of an impact.
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In a nod to the notion that the government should do something to help "responsible homeowners," the plan also seeks to help borrowers who have been making mortgage payments on time but can't refinance into cheaper loans because they've seen equity in their homes evaporate as prices have plummeted. The federal housing agencies Fannie Mae and Freddie Mac will now refinance loans they hold or guarantee, even if borrowers owe more than their house is worth - up to 105% of the value of the property. The Administration figures that offer could reduce monthly payments for four to five million borrowers. But many of the same limitations apply to this part of the plan. Only interest payments will be lower, not principal balances. Homeowners who owe more than 105% of the value of their houses - as is often the case in the worst-hit areas of the country - will be ineligible. And holders of jumbo loans need not apply. Again, that might reflect a sense of fairness - why should we help people who stretched beyond their means to buy McMansions? - but it also ignores the reality that the delinquency rate among jumbo loans is spiking and a foreclosed property hurts the value of surrounding ones, no matter the size of the house. Finally, the plan bolsters the amount of money allocated to Fannie Mae and Freddie Mac in an effort to keep mortgage rates low and entice new homebuyers into the market, since new buyers are what's needed to drive down the number of extra houses for sale. The two agencies, which financed or guaranteed nearly three-quarters of new home loans last year as private players retreated, will now be allowed to hold more mortgages on their books, and could eventually see additional infusions of cash from selling preferred stock to the Treasury Department - an authority granted in legislation last July. Those moves, as well as Treasury's continued purchase of Fannie and Freddie mortgage-backed securities, are designed to instill not only liquidity, but also confidence, in the housing market. Back to TOP |